What is a Budget and how do I make one?

13 August 2018Wonga

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What is a budget? A budget is the system that helps you keep track of your income and outgoings. A budget is a system that gives you the power to control your money! Join us as we show you how to make your own budget...

Budgeting: the benefits

The upsides to being in control of your spending are pretty much endless. Knowing where you’re spending puts you in the driving seat. It shines a big bright light on where your cash is going, and helps you zoom in on some important money goals.

A budget should help you stop overspending and will hopefully show you where you can actually afford to save. A good budget will also give you a buffer, ready to absorb the shock of big bills or sudden essential spends.

Sounds good, but daunting. Where do I start?

First of all, put the kettle on. Take some time, sit down with a cuppa and a pile of bank statements and recent bills, and do this budget thing properly.

You can use online budget planners, like the ones at Money Saving Expert or the Money Advice Service, or you can use a spreadsheet or scribble all your number-crunching in a notebook. Find whatever method works best for you. That’s the only way you’ll stick to it.

Work out your income

Add up all your income, each week or month for a minimum of three months, including your salary, benefits and any other money you receive. If you’re calculating a monthly budget, add up that total over three months and then divide it by three to get your average monthly income. This tells you how much you actually have to spend.

Add up the essentials

Now it’s time to look at how much you’re spending. Remember, the secret to any successful budget is brutal honesty.

First of all, include your essential spends. Add up how much you fork out for your mortgage or rent, utility bills and council tax, food, car or travel, and childcare over three months. Divide by three to get your average essential outgoings.

And there’s more…

Those are the obvious spends, and subtracting your essential monthly outgoings from your monthly income will then give you your disposable income – this is your slush fund for spending on non-essentials.

But there will still be things that you spend every month and, while they may not be crucial, they are an important part of your lifestyle. So it’s time to get adding again.

Go through your bank statements and tally up how much you spent over three months on things like going out, takeaways, coffees, birthday presents, kids’ clubs and the like. The average family spends £45 a week on eating out, for example, so that’s an important item to have on the list.

Work out your monthly average again and then add together the total for these things with the total for your essential spending. If the total is more than – or very close to – the amount of money you have coming in, you need to keep a close eye on your finances, starting with working out this budget.

Don’t forget…

Most people get caught out by big unexpected bills for things like car repairs, MOT or insurance payments. But if we’re honest with ourselves, they’re not that unexpected after all. Again, go through your bank statements for the last year and find all these big cash curve balls.

You can then either total them and divide by 12, making sure you set aside enough money to cover them in your monthly budget, or you can make a note of when those bills fall and use your budget to set aside enough money to cover them. Allow a bit extra for the truly unexpected, like broken-down boilers or major car repairs.

Set your goals

This is what all this number crunching is really for. If you’re trying to get out of debt, build up a fund for a house deposit, put away money for your old age or simply save for two weeks in the sun, a budget will help you get there.

Writing down your goals will help you commit to them. For extra oomph, try to visualise how your goal feels. Imagine how liberating it will be to finally achieve debt-free status or, if you’re saving for a dream holiday, pin up pictures to remind you how great that sand will feel between your toes.

Work out how much you need to save to make those goals a reality, remembering to prioritise paying off debts above saving or spending. Work out the monthly amount you need to put aside and how long you need to do that for to make your goal a reality.

Change your habits

Now you’ve worked out where your money goes, you can start to see your bad spending habits. That little daily latte actually adds up to a whopping £50 a month (that’s £600 a year. Yikes!). Cut that out and you could clear your credit card or save for a holiday in the sun.

Most people start a budget when money is really tight, but when you’re back on the right track it can be all too easy to dip back into your old ways.

To keep to your budget long term, get into the habit of checking bills, statements and receipts. It’s all too easy to skip over the paperwork that arrives in your email inbox, but it’s vital you check you haven’t been overcharged and that there’s been no fraud on your account.

You’re more likely to stick to it if you allow yourself treats – just make sure you budget for them first. If you want to splurge on clothes or eat out more often, no problem. Just arrange it in your budget first, making sure you can spend without counting the cost later.